1# Find your price point and set a goal
Looking for a house or apartment can both be fun and scary. The fun part is to vision your new lifestyle in the homes you look at, and the scary part is when you see the price tag. I’m personally going through this right now with my partner and wanted to share some tips on how to get on the right path. The first part is to set your price point, this is where you (and your partner) figure out how much you can pay in mortgage each month without it straining your monthly budget. There are simple tools as Googles Mortgages calculator where you can do some back of the napkin calculations. When you get a little closer to making a decision you can user some more complicated calculators. In our case, we’re looking to spend a maximum of $3k a month which would set our loan amount to $650k.
2# See what you can afford
Now when you have a realistic view of what you can spend, it’s good to start looking at what you can afford. We are looking for an apartment in the New York City & Jersey City area and here you can find anything from an insanely priced 6 bedroom condo for $ 82 Million. To super cheap houses.
Some of my key factors are:
- How long commute can you do?
- How close do you want to be to the city center?
- How much space do you need?
- How many bedrooms do you need?
It could be different in your case depending on your own preference. In our case, we feel that a 2 bedroom around 900 sqft is ok for us as we would prefer a maximum commute of 30min to both our jobs. So now we have a clear idea of what to look for, and of course, if we find something bigger and closer in our price range we would look at that.
3# Improve your Credit score
Improving your credit score is almost as important as the saving part, when buying a house. This could lower your interest rate and increase the amount you can afford to spend on a house. E.g the difference between a 3.4% interest rate and 4% would mean that we would lose $50k in loan value to spend on a house. Here is a good guide on how to improve your credit score.
4# Create a budget
Now when you have figured out your goal, it’s time to create a plan on how and when to achieve it. The best way to start is to look at your monthly income and expenses and see how much you can put away from each paycheck. The important part is that you set your desired savings amount and put it away the second you receive your paycheck and not after the month is over. There are a lot of tips out there on how to construct a budget, you can even download Bank of America’s budget template here. However, they overcomplicate things. The only thing you need to do is look at your monthly income, what expenses are necessary (fixed) and which ones are nice to have (frivolous). Subtract the fixed expenses from your monthly income and the amount you have left is savings plus frivolous spending.
5# Start saving early
Start saving early. I know that you have heard this one before but it’s more important than you think. Thanks to compounding returns you see exponential growth in your savings (that’s a bankers language for “let your money do the work for you”) .
I’m not saying that you should save for 40 years but it’s interesting to visualize what time makes to $5,000 a year. My tip is to start saving small, the important part is to get started and then you can increase your monthly savings from there.
6# Set your investment strategy
This is the most important part of saving for a house. If you look at the chart above, the difference between a 2% return vs. 8% return makes a huge difference. It just so happens that the average return on stocks has been 8% for the last 100 years. This doesn’t mean that just because you put your money in one single stock it will give you a 8% return. Luckily, you have SprinkleBit which help you figure all that stuff out and you can even follow my portfolio in there. 9 out of ten users beat the market last year and 5 out of 10 had a return better than 35% in 2015. So far I’m up 567% over the past 3 years. In this case, if you needed a down payment of, say, $50k it would have been enough to start with $7.5k. However, this is not always the case but there are other great investors and premium tools that could help you hit your goals faster.
7# Start looking early for your dream house
Finally, you have saved up and start getting closer to buy a home. I suggest start feeling the market almost a year in advance to see what neighborhoods you like and what style of house or apartment that speaks to you. Figure out what the average price is for your type of home is in that neighborhood. Go on a few open houses etc. The reason you should do this is because you can spend years saving up for the perfect home, but it might turn out that it was in the wrong neighborhood or something that really doesn’t fit you and you have to sell your house and might take a loss in doing so. Keeping this in mind will help you keep and preferably grow your hard earned investment. You can find me on SprinkleBit if you have any thoughts, questions, or ideas.
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